Economic Prosperity in India

By Keval Shah

Introduction

The International Monetary Fund (IMF) has stated that India should expect to see significant economic growth in the next two years, which will give the nation the title of fastest-growing economy word-wide. India is estimated to have a growth rate of 7.4% in 2019 and a growth rate of 7.8% in 2020 – which is a significant increase from this year’s growth rate of 6.7%.

Official estimates indicate that India’s growth will truly begin to take effect in the second half of this year, with growth rates increasing from 6.5% to 7%. India is also expected to see an increase in earnings during the October-December quarter of this year, which only provides more evidence in favor of this projection.

This two-year projected growth rate would mean that India will soon eclipse China in that metric, whose current growth rate of 6.8% will only see a decline in the next two years. Meanwhile, the United States is projected to have a growth rate of 2.5% on 2019.

Resurgence in India’s economy began to become apparent in December of last year. Automobile sales became robust, with passenger vehicles sales rising 5.2% and commercial vehicle sales rising 52.6%. Meanwhile, the stock market also began to surge, hitting new records on a weekly basis.

Accuracy of Projection

Compared to the projected economic growth of the United States, the growth rate of India seems relatively high. However, when you consider that the United States is a developed country the projection appears to be accurate. Generally speaking, developed countries have a much slower economic growth rate while developing nations have a much faster growth rate. With India being a developing nation, this projection makes sense in comparison to that of the United States.

India’s projection of higher earnings in the fourth quarter of this year also has significant implications on the accuracy of the projected growth rates. Higher monetary earnings for a nation will, by default, have positive impacts on the status of economic growth. With India expected to see higher earnings for its citizens during the months of October-December of this year, it only confirms the fact that the nation will see positive economic growth in the coming years.

Speaking of positive economic growth and higher income, the increase in automobile sales only reinforces this fact. A positive raise in automobile purchase rates indicates that the residents of India are becoming more well-to-do, which signifies an increase in economic well-being. As purchases – such as that of automobiles – increases, we know that the citizens of India are prospering economically, and that trend will surely continue in the coming years.

The Solow Model

One method economists use to project growth rates of a nation is the Solow Model. The Solow Model was created in 1956 By Robert M. Solow. The Solow Model utilizes inputs such as capital and labor in order to determine the future economic growth of a nation. When inputted into the model, capital and labor do justice in determining whether or not a nation will see economic growth or decline in the future.

The economic times of India has suggested that capital has significantly grown within the nation in recent years. “This may not bring cheer to the estimated 1 million youth entering the workforce every month. Capital is increasingly replacing labour in Indian industries. With the cost of labor jumping manifold, companies have preferred to employ a fewer number of workers and have instead focused on improving productivity amid a sharp increase in deployment of capital. While employment has grown at an average of 1.9% per annum between 1980 and 2015 for which data is available, capital employed has increased at a CAGR (compounded annual growth rate) of 14% during the timeframe. “One of the key reasons of such low growth in employment has been the increasing capital intensity of the Indian industrial sector,” observers said.”

While labor has decreased within the nation, the increase in capital makes up for that fact. As a result, India is now seeing record growth rates. The work force in India has become more efficient than ever, and the production output indicates so. So long as India continues to implement this positive change, they will continue to economically grow at a rate much higher than any other country in the world.

Conclusion

For the first time in many years, India is thriving economically. It is important to recognize that they are a developing nation, thus their growth rates will be higher than that of a developed nation – still, projections indicated by the IMF and the Solow Model are promising.

With a population of nearly two billion people, it is important for India to continue to thrive on an upwards trend economically. If the nation continues to implement the strategies correlated to their current finding, it is realistic to expect the nation to be significantly well off in the coming years compared to where they are at this present moment.

4 thoughts on “Economic Prosperity in India”

I personally find really interesting to see how China and India have been able to surge as the world’s most prosperous and rapidly growing economies. Increases in the GDP per capita will surely have positive effects in the whole country. Higher incomes should always lead to less poverty. However, I wonder if such exceptional growth rates have been translated in the same proportions to the decrease in poverty. Furthermore, I think it would be interesting to really see how the trends in inequality have behaved during these years of economic prosperity. Has it made everybody in the country richer so in theory inequality has remained the same? Has it benefited the poorer populations generating a decrease in inequality? Or has it benefited the top group of the population making poor people relatively poorer, hence, more unequal?

It was interesting to see how the sales of automobiles in India was used as an indicator of economic well-being and prosperity. I wonder what kind of cars exactly saw a hike in sales. Tata motors are India’s more affordable vehicles and sell at very low prices. In that sense, it would be interesting to find out exactly what demographic is potentially buying more vehicles. If Tata sales are up then perhaps one could estimate that there is a greater economic wellbeing in the up and coming lower middle class of India. Alternatively, if more car sales increases were only seen in luxury or imported cars such as Audi and Volkswagen then perhaps it is only the middle class and rich that have gained. Hopefully, India can continue to maintain this growth pattern and sustainably grow, but as you conveyed it seems that every developing nation will eventually see a decrease in growth as they become more developed. South Korea and Japan are examples of the latter. Nonetheless, it is still great to learn about India’s economic potential.

I appreciated the comment in the article about how the distribution of income was also benefitting rural areas. The volume growth is slightly concerning due to the movement away from industrialization. A growth in the economy intuitively marks an improvement in conditions. However, one could argue that it shows that India is still in the midst of industrialization and is further from the developed level than previously thought. China has begun to slow down in economic growth, marking a more developed approach to the economy in terms of trade and policy. India’s levels are marked by the durable goods market. The reason why automobile sales are an important indicator of economic health is that it demonstrates a shift towards consumers investing in more durable goods. This means that consumers have greater incomes overall which does mark economic growth.

It was interesting to hear that India would be passing China in growth because China has been leading that race for the world for so long. There is a lot that India seems to be doing to help improve there gross domestic product growth rate. You brought up the fact though that India is hiring less people. Its good that the economy is growing but this could be having great negative effects on their labor market. This would be a concern with the issues of poverty. I fear that if they are trying to optimize productivity and end up paying some workers more while others are fired this could lead to large inequalities. It would be interesting to see if the impact of hiring less workers goes with or counters the growth of GDP effect on poverty levels. As well as if poverty is decreasing is the Gini coefficient and the lorenz curve showing the inequality changing. If the inequality is widening India may have to rethink their strategy to try to engage more workers while still profit maximizing. It will be interesting to see moving forward how poverty levels change if the predictions turn out to be true.

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This blog is a project for Econ 416: Theory of Economic Development, at the University of Maryland. Posts are contributed by undergraduate students, and do not represent the views of the University of Maryland.